East Tennessee State University

Digital Commons @ East Tennessee State University

Undergraduate Honors Theses Student Works

5-2022

Exploring Inventory Management's Effects on a Company's

Profitability
Mason Frye

Follow this and additional works at: https://dc.etsu.edu/honors

Part of the Business Administration, Management, and Operations Commons, and the Management
Information Systems Commons

Recommended Citation
Frye, Mason, "Exploring Inventory Management's Effects on a Company's Profitability" (2022).
Undergraduate Honors Theses. Paper 695. https://dc.etsu.edu/honors/695

This Honors Thesis - Open Access is brought to you for free and open access by the Student Works at Digital
Commons @ East Tennessee State University. It has been accepted for inclusion in Undergraduate Honors Theses
by an authorized administrator of Digital Commons @ East Tennessee State University. For more information,
please contact digilib@etsu.edu.
Exploring Inventory Management’s Effects on a Company’s Profitability 1

Exploring Inventory Management's Effects on a Company's

Profitability

By:
Mason Frye

An Undergraduate Thesis Submitted in Partial Fulfillment of the

Requirements for the Honors-In-Discipline Program

Honors College
College of Business and Technology
East Tennessee State University

____________________________________________________
Mason Frye Date

____________________________________________________
Bill McTier, Thesis Advisor Date

____________________________________________________
Dr. Umit Saglam, Thesis Reader Date
Exploring Inventory Management’s Effects on a Company’s Profitability 2

Abstract

Effective inventory management policy is a recognizable critical driver for company

success, but which techniques and tools are relevant today? This thesis explores the theory that a

company's inventory management practices directly impact the firm's efficiency, responsiveness,

and profitability. Research from previously published studies on inventory management is shared

to develop a framework of understanding to answer the question of relevancy. Additionally,

interviews with successful business professionals within the field provide additional insight into

specific inventory management practices that affect profitability and performance. Moreover,

these professionals discuss how the practices are effectively applied in the real world today.

Finally, this thesis will explore specific challenges the coronavirus pandemic presents for

inventory managers across the globe and strategies that industry professionals are utilizing to

manage through these taxing times.

INTRODUCTION

This thesis is a qualitative study on inventory management's effects on profitability and

what types of tools, techniques, standards, and ideologies are relevant in determining the overall

impact on profitability. This thesis explores these topics in a literal sense of the term and relates

them to real-world scenarios to better apply the information found in the research phase.

Research on profitability measures such as profits, profit margins, and lowering overall cost will

serve as the standard for measuring profitability during this study.

Research Scope
Exploring Inventory Management’s Effects on a Company’s Profitability 3

While studying inventory management's effects on a company's profitability, the main

focus is the essential tools and techniques still relevant in the current business climate while also

discovering what role they fulfill related to profitability. Therefore, this study aims to identify

these relevant tools and techniques and to discuss and exemplify their use within business in an

easily understood method. Additionally, the coronavirus pandemic will be studied as it relates to

global business and how it has affected profitability since its origin in the first quarter of 2020.

Limitations

A limitation of this study is that it is a qualitative research-based study. The research

methods used within this thesis are in greater detail in the methodology section. However, it

should be made aware that the most current methodologies are incorporated to minimize any

limitations within the thesis research.

Another limitation would be that only topics relating to inventory management were

considered when looking for factors affecting a company's profitability. Many other factors

should be reviewed when evaluating a company's profitability on an executive level, but for the

purpose of this thesis, they were excluded from the study.

The final limitation relating to this study is the potential for researcher bias to influence

what secondary data is reviewed, chosen, and included within this study by the researcher. This

bias is not intentional, but should be made aware as the researcher will choose what data and

information to include in the study based on their values.

Purpose of the Study

The purpose of this research is to determine what effect(s) inventory management has on

a company's profitability. As stated in the Research Scope portion, this thesis will transform the
Exploring Inventory Management’s Effects on a Company’s Profitability 4

information gathered from research into real-world applications and relate them to businesses in

nearby proximity to East Tennessee State University, such as Eastman Chemical Company.

Description of Terms

Inventory Management: "Inventory management refers to ordering, storing, using, and

selling a company's inventory. This includes the management of raw materials, components, and

finished products and warehousing and processing of such items." (Hayes, 2022).

Profitability: Profitability is a measurement of efficiency – and ultimately its success or

failure. A further definition of profitability is a business's ability to produce a return on an

investment based on its resources compared to an alternative investment."

(Horton, 2021).

Conclusion

Data suggests a relationship between well-maintained inventory management and a

company's profitability. However, what tools, techniques, standards, and ideologies are relevant

in assessing this relationship? This remains to be the primary focus of this thesis.

METHODOLOGY

Introduction

This section aims to discuss the methodology used to investigate inventory management

and its effects on a company's profitability. Additionally, this section includes a justification of

the research design theory applied. The methodology of this section is modeled after the

"Research Onion Theory" (2007) by Saunders et al. to clearly define and outline why the

research is structured the way it is.

Research Design Theory

Research Philosophy
Exploring Inventory Management’s Effects on a Company’s Profitability 5

Myers (2008) claims that most business-oriented case studies use the interpretivism

research philosophy due to its observational nature related to business research. Given that this

research uses qualitative research methods, it is apparent that interpretivism research philosophy

is also present. This means the researcher interprets the fundamentals of the study and the

meaning of the data for the thesis. Since this study is qualitative and contains no qualitative

analysis, interpretivism is the research philosophy applied in this thesis.

Research Type

The research for this study was inductive, meaning that the research was constructed from

the ground up. Inductive research focuses on experience and patterns combined to generate a

hypothesis rather than a quantitative analysis. (Goddard and Melville, 2004). This thesis' study

will conclude by forming a hypothesis instead of a statistical/causational conclusion, furthering

the appropriation of the inductive research type.

Research Strategy

The nature of this research falls within the archival research category of research

strategies. Georgia State University's library defines archival research as "research involving

primary sources held in archives, a Special Collections library, or another repository." The

following examples can serve as archival sources: documents, records, objects, and sound and

audiovisual materials (Georgia State University Library). Utilizing a research strategy like

archival research will provide a strong foundation for the thesis grounded upon previous

researchers' findings.

Sampling Strategy

The sampling strategy for this thesis includes both non-probability and non-randomized

strategies. Since the researcher chose the topics discussed in this thesis, the findings are a part of
Exploring Inventory Management’s Effects on a Company’s Profitability 6

the non-probable section of the research sample. Furthermore, given that the researcher

subjectively selected the information in the thesis and all topics had an equal chance to be

included, all information included from previous sources also falls under the non-randomized

section of the research sample.

Data Collection

As mentioned previously, the type of data collection used in this study is archival

research. This includes retrieving archived reports, published master's theses, doctoral

dissertations, and other similar types of documents. Additionally, information will be gathered

from other sources, such as annual reports from Eastman Chemical Company and online

statistics collection.
Exploring Inventory Management’s Effects on a Company’s Profitability 7

Literature Review

Inventory management is critical to many firms' success and sustainability. Therefore, it

requires management priority and scrutiny. Golas (2020) states that, “based on panel regression

models, one study demonstrated that an improvement in inventory management efficiency is

positively correlated with financial performance, measured as the return on operating assets.”

(ROA). Additionally, statistical evidence conveys the significance of inventory impact on the

global and domestic economy and as a macroeconomic indicator. "Historically, a declining

growth rate in the inventories-to-sales ratio has coincided with increased economic output."

(Kalivas, 2018). Moreover, inventory is a critical component in many categories of firms,

industries, and supply chain investments. "Companies can reap a 25% increase in productivity, a

20% gain in space usage, and a 30% improvement in stock use efficiency if they use integrated

order processing for their inventory system." (EasyPost, 2019). Before exploring specific

inventory management practices and their impact on profitability, it is essential to review the

relevant research on fundamental inventory practices. The review of these practices will help

provide a framework for our discussion.

Thomas Lee Herzig researched last-in, first-out (LIFO) and first-in, first-out (FIFO)

inventory management policies and their effects on profits and cash flow while studying at the

University of Wisconsin-Milwaukee. Some of the generalized points that Herzig finds in his

research consist of the advantages and disadvantages of both LIFO and FIFO, laying out the

parameters of the study/project he will be conducting, and different scenarios that could happen

when evaluating FIFO and LIFO conditions. According to Herzig, FIFO is better when the

conditions consist of low inventory turnover and rising prices because profits are inflated due to
Exploring Inventory Management’s Effects on a Company’s Profitability 8

inventory profit, while LIFO under these same conditions would limit inventory profits (Herzig,

1976).

The article "Inventory Management: Controlling Costs to Maximize Profits" provided

some excellent insight into how consistent inventory evaluation can improve lead time, help

process customer orders efficiently, and maximize storage space and equipment. According to

the report, "Inventory reviews are best conducted by an auditing team of managers whose jobs

relate to materials planning, acquisition, handling, and storage." (Anonymous, 1987, p. 50).

There are several fundamental ratios mentioned in the article that measure materials handling

efficiency. The ratios include storage space utilization (a measurement of how efficiently a

company is using their storage facilities), inventory fill (the amount of inventory in customer

orders expressed as a percentage of the total inventory), materials handling/labor (the percentage

of labor being used to exercise materials handling), among others. Utilizing these ratios allows

companies to measure the improvement, or lack thereof, of materials handling effectiveness.

Liu Yang, a former Durham University business school student, focuses on how

improving order fulfillment and optimizing inventory can enhance profitability. According to

Yang, employing inventory classification systems and scrutinizing inventory costs are "essential

to the company's short-term profitability and long-term customer relationships." (Yang, 2016, p.

3). Compelling reasons to classify inventory include simplifying inventory audits, reducing the

amount of stock on hand by increasing the inventory turnover ratio, and enabling businesses to

fill limited inventory space with more profitable products. For example, if a company procures

1,000 units of inventory of a product that sells ten units per month, it will experience associated

inventory carry costs for years to come. This assumes that the product does not perish or become

obsolete over the period. Developing an appropriate inventory classification system and
Exploring Inventory Management’s Effects on a Company’s Profitability 9

conducting regular audits alert managers to slow-moving items and stimulate actions to correct

the issues before efficiency and profitability are impacted.

Inventory classification relative to effective inventory management provides many

benefits. The advantages include focusing on inventory items that generate the most profit and

revenue, managing the most critical items more closely, and improving efficiency, speed, and

accuracy by investing in an automated inventory management system to manage the less

essential items. Dr. Joseph Cavinato assessed thirteen different inventories that a company might

store in its warehouse(s) and how companies should manage each. Cavinato discusses Raw

Materials and Components, Work-In-Progress Goods, Finished Goods, Resale Goods, Company

Supplies, and Spare Parts for Sale. Cavinato also discusses Promotional Materials for

Marketing/Sales, Trade-In Goods, Return/Rework Goods, and Idle Capital Goods, amongst

several others. Cavinato proposes that managers should know what types of inventories they

have and understand how they work to classify, manage, and distribute their inventory more

efficiently.

Martin P. Edelman discusses the importance of inventory turnover and understanding how

to calculate and apply this crucial inventory management ratio. Edelman defined inventory

turnover as "a measure of how well your inventory investment is working for you" (Edelman,

1990, p. 51) as well as "the number of times that an inventory "turns over" or cycles during the

year." (Edelman, 1990, p. 51) The formula for calculating inventory turnover is the annual cost

of sales divided by the annual inventory cost. The benefit of more inventory turns is lower

inventory costs, improved cash flow, and potentially higher revenue and profits.

An example of the impact of inventory turns on business comes from an article by Larry

P. Vellequette entitled, "OVERSTUFFED: Near-record inventories eat dealer profits as floorplan

Exploring Inventory Management’s Effects on a Company’s Profitability 10

costs surge." The article focuses on automobile manufacturers, the dealerships selling their autos,

and how they are losing money as inventory turns on their cars are seemingly becoming slower.

Vellequette states, "if a downturn comes, dealers sitting on big inventories could find themselves

in a great deal of trouble." (Vellequette, 2019, p. 10). During an economic downturn, companies

that sit on these large numbers of cars will be hurting because they have paid out large sums of

money to acquire these cars that are just collecting dust on their lots. Simply put, if inventory

cannot sell, companies cannot turn the inventory into cash needed for covering operating

expenses, generating profits, and fueling growth.

Indiana University's Stephen Mahar wrote a dissertation regarding inventory and

distribution strategies for retail/e-tail organizations. Many omnichannel companies use brick-

and-mortar stores to pick, pack, and ship online orders. Mahar discusses an online fulfillment

assignment model that companies can use to help with their single and multi-product online

orders and deliveries. This model allows for the process viewing from multiple ordering

viewpoints. In addition, understanding how different order and delivery processes operate allows

for more straightforward implementation into a new business, creating a new revenue stream for

the business.

Boray Huang's dissertation about inventory policies in a supply chain with information

systems was written in 2004 when businesses began utilizing the Internet and EDI (Electronic

Data Interchanges) to improve their supply chain's performance in several aspects. EDI,

electronic exchange of documents between business partners, allows inventory managers to

better communicate through the supply chain. This faster and more efficient communication can

allow them to replenish depleting inventory levels and fulfill customer orders quickly. Huang

also goes into detail about how utilizing EDI, the Internet, and other technology properly can
Exploring Inventory Management’s Effects on a Company’s Profitability 11

give businesses a competitive advantage over their competition. Moreover, in the age of

coronavirus, more and more companies are encouraging their employees to work from home.

Other electronic aiding tools like Zoom/Microsoft Teams, email, instant messaging, and

inventory monitoring systems allow employees to work remotely while maintaining efficiency.

Improved technology and efficiency in combination enhance a firm's profitability.

Additional technology tools that enhance customer convenience and the customer

experience can also reduce costs. ASAP Systems is one of the world's leaders in inventory

systems and asset tracking. In 2019, PR Newswire published an excerpt that explained their new

Inventory Cart Module. "The Inventory Cart Module offers the ability for users to log into their

warehouse to browse their available inventory and add items to their Shopping Cart." (ASAP

Systems, 2019, p. 2). ASAP Systems allows suppliers to limit the amount and the specific data

that the users logging in can view. They can limit this within the software before the service goes

live to their customer base. This gives companies the service of allowing their customers to log

in and view available products and place their orders without wasting time communicating this

information over the phone or email. Another benefit of this program is the ability to save paper

from being sent back and forth, causing potential miscommunication if the papers were to get

lost, while also helping companies stay green. All of this is accomplished without having to

display any more information than the company feels necessary.

Another essential inventory management tool is the RFID (Radio Frequency

Identification) system. RFID systems use radio frequencies to wirelessly communicate across

devices to identify a product, object, or anything else that a company may require to

identify/track. RFID systems "[Reduce] the time required and labor associated with cycle counts

and allows warehouse owners the ability to perform more frequent cycle counts (daily/weekly)
Exploring Inventory Management’s Effects on a Company’s Profitability 12

without disrupting day to day activities" (RFID Inventory Systems, Inc., 2016, p. 4). The source

also shares examples of organizations that use RFID technology, including T&W Operations,

Inc., a Service-Disabled Veteran-Owned (SDVO) small business, and "Alien Technology is a

leading technology and product provider of UHF Radio Frequency Identification (RFID)

Integrated Circuits (IC), tags, readers and professional services." (RFID Inventory Systems, Inc.,

2016, p. 15).

The coronavirus has presented challenges that the business world is still trying to

overcome. Shortages in many essential products and components, increased demand for many

goods with a lowered supply availability, and inflated prices on everyday goods are only a few of

the initial challenges created by the pandemic. For example, according to a NASDAQ OMX

article, the coronavirus caused a massive shortage of PPE (Personal Protective Equipment) in the

initial phases of the pandemic. In addition, it forced some medical professionals to find new PPE

gear to use in their jobs. According to the article, "Other trends affecting the PPE supply chain

are strategic national stockpiles, demographic changes in the working population, new business

models manufacturers' focus on comfort, and resource scarcity." (NASDAQ QMX, 2021, p. 4).

Emerald Publishing published a review in 2021 about how different industries suffer from

the coronavirus. For example, "COVID-19 caused the free movement of goods to become

restricted, with particular issues arising from the cessation of transporting raw materials in many

industries." (Emerald Publishing Limited, 2021, p. 23) There is a continuous demand for these

goods, but companies are still trying to get their inventory levels up to par. The article details the

harsh effects that the food industry has had to go through during the pandemic and how they are

only now beginning to show signs of recovery. Finally, the article discusses the pandemic's

influence on consumer behavior unpredictability, spending habits, adopting new habits from the
Exploring Inventory Management’s Effects on a Company’s Profitability 13

business perspective, developing agile production processes, and modifying inventory policies to

better align with current conditions.

Discussion

Inventory management is critical to a company's success because it helps determine the

proper amount of inventory to have on hand to limit stockouts, inventory carrying costs, and

inaccurate records. Therefore, it is essential to discuss some of the companies' effective practices

to manage and control inventory effectively. Topics and practices including successful supply

chain management, appropriate inventory management methods, accurate inventory counting

methods, inventory turns optimization, and intuitive inventory classification systems are all

relevant to effective IM policy. Additionally, this discussion will address modern technology

applications pertinent to IM policy and address IM challenges within the framework of the

coronavirus pandemic.

Inventory management methods such as first-in, first-out (FIFO), and last-in, first-out

(LIFO) are prevalent in nearly every company. With FIFO, the company's first piece of

inventory in possession is the first one to leave when the inventory unit is used or sold. Whereas

in LIFO, the last piece of inventory that comes into the company's possession is the first one to

leave when the inventory unit is used or sold. It is at the company’s discretion to decide which

method is best for its business. Companies do not necessarily have to commit to one method

exclusively. For example, Eastman Chemical Company, based in Kingsport, Tennessee,

determines the cost of most raw materials, work in process, and finished goods inventories in the

United States and Switzerland by the LIFO method.

Exploring Inventory Management’s Effects on a Company’s Profitability 14

In contrast, the cost of all other inventories is determined by the average cost method,

approximating the FIFO method. The average cost method is when companies assign inventory a

cost based on the total cost of that inventory in a given period divided by the total number of

items purchased in the same period. (Tuovila, 2020). Therefore, LIFO tends to be better for tax

purposes as many companies will switch to LIFO alone. However, companies risk creating a

batch of inventory that becomes old and potentially obsolete with LIFO. If the company's

inventory becomes obsolete, it can lose money through profit margins because it either has to sell

the inventory to secondary markets or destroy it if the inventory is a perishable item. Therefore,

switching from one method to another can reduce the value of the company's inventory and

working capital while also running the risk of violating debt covenants and having loans or lines

of credit restricted (Herzig, 1976). Another consideration when switching between FIFO and

LIFO, several government regulations and forms must be submitted promptly to avoid accruing

additional government fines or penalties. Moreover, switching to LIFO is irrevocable for a

business unless they obtain permission from the Internal Revenue Service (IRS) to convert to a

different method. So, each company must weigh its options and assess its inventory to determine

which method(s) will help it achieve the optimal profit and the lowest tax liability.

An important metric for companies to maintain within their inventory management system

is inventory classification. Classifying a company's inventory is important because it allows

management to see trends in inventory sales from period to period. For example, the table in

appendix 1.1 shows that inventory is classified into three categories in Eastman Chemical

Company's 2020 annual report. By properly classifying its inventory, Eastman can see the

changes in the different categories from year to year. Perhaps if one area of its inventory is

consistently struggling, managers can assess what that specific area requires to become more
Exploring Inventory Management’s Effects on a Company’s Profitability 15

profitable. While Eastman only uses a handful of various inventory classification types, there are

numerous others commonly used across the world:

• Resale Goods are finished goods received and shipped with a few changes.

• Company Supplies are maintenance, operating, or office goods in which the company is

the final user.

• Spare Parts for Sale are extra or leftover parts of finished goods that the company can sell

to other firms.

• Promotional Materials are catalogs, brochures, or information packets that promote the

company.

• Return/Rework Goods are goods that were either returned to the company within the

allowed time frame or warranty claimed repairs/returns.

• Idle Capital Goods are goods the company will use in future installations. (Cavinato)

Another benefit to companies classifying their inventory is that it can help managers manage

their products more effectively. Not every type of inventory is managed the same way because

each is unique. Being flexible enough to manage each type of inventory will help the company

get the most out of its products and increase revenue and profitability. The primary reason for

using inventory classification is that the number of SKUs is too large for companies to

implement an inventory control policy for each item (Ernst and Cohen, 1990). Companies

typically have stock measuring devices like SKUs (Stock Keeping Units) to help them keep track

of their inventory. A SKU is a scannable bar code that allows the company to easily track their

goods' movement. Additionally, classifying the company's inventory into sections allows data

analysts to see which inventories are most profitable and which ones are not. Finally, inventory

classification allows the company to either increase the stock levels of the most profitable
Exploring Inventory Management’s Effects on a Company’s Profitability 16

inventory items or determine why specific inventory items are not making the company as much

money as expected. Having an enterprise view of this information can give companies an

advantage over their competitors. These companies are ahead of the market concerning specific

inventory items that are not selling and which ones are on the rise in popularity. Most products in

modern warehouses have a unique SKU attached to them, which identifies their singularity to the

rest of the inventory management system.

Many companies have implemented inventory management technology within their

operations department to lower overall costs while increasing profit margins and productivity.

Companies should consider using numerous inventory management software and systems to

achieve these objectives. As previously mentioned, RFID systems are wireless communication

systems that incorporate electromagnetic fields to track and identify products with the tags

attached. One of the more common forms of RFID technology applications is the "scan guns"

that self-checkout systems use and the type used at retail stores like JCPenney or Belk to scan the

merchandise purchased. Another common type of RFID system is the supermarket/grocery store

scanning systems used at Walmart or Target checkout lines. The supermarket employee scans the

bar code of each item over the built-in scanning tray next to the register. RFID scan guns show

that the inventory has arrived at the warehouse/store to which it was shipped. Later, the pallet

that the product arrived in is scanned and documented as being placed on the floor. Finally, the

product is scanned to show that it is shipping to its next destination, often the customer, or

purchased at one of the checkout registers. Tracking inventory in this manner is beneficial for

many reasons. Outdated, traditional inventory counting methods can be extremely costly to

companies. Companies must frequently conduct these counts in retail environments after hours

when the store is closed. Additional counts require the company to pay the employees
Exploring Inventory Management’s Effects on a Company’s Profitability 17

conducting the inventory count, usually putting the company over payroll limits for that

particular week. Typically, some employees are full-time and work beyond the 40-hour

workweek, requiring the company to pay overtime. Moreover, many employees are not

adequately trained to conduct inventory audits.

The benefits for using RFID systems are many, including having employees spend less

time in warehouses or stores looking for missing inventory. With the products being scanned

anytime they move from one location to another, operations associates can better track the

inventory and trace the steps back to observe where the items were last seen and processed.

Additionally, companies that take advantage of RFID systems can experience a decrease in

accidental stockouts. With less inventory loss, time spent counting individual pieces of inventory

and money spent on unnecessary payroll hours, companies maintain a more accurate database

that provides their customers with a better purchasing experience. According to Buttle and

Malkan (2019), "Given that customer satisfaction is largely driven by customer experiences in

buying and using products, we can conclude that the direct form of CE (buying) is usually a

consequence of customer satisfaction."

ASAP Systems is another inventory management system that has proven its worth within

the business world. ASAP Systems is an industry-leading barcode inventory system and asset

tracking program utilized by companies within different industries worldwide. ASAP Systems

has remained an industry leader for many years due to continuous innovation, enhancing

company efficiency, and improving the customer experience, which positively drives sales. One

of ASAP System's more recent innovations debuted in 2019 when it announced new

improvements to its inventory shopping cart module. Like many ASAP Systems programs, the

inventory system shopping cart is effective across numerous industries. "The Inventory System
Exploring Inventory Management’s Effects on a Company’s Profitability 18

Shopping Cart is a beneficial tool for users within medium to large organizations, including IT

companies, Police & Fire Departments, Education, Military and Government Installations"

(ASAP Systems, Inc., 2019, p. 2). The inventory shopping cart module allows customers to log

in to the company's warehouse, browse the current in-stock inventory, and add various items of a

quantity of the customer's choice (given that the requested quantity is in stock) and purchase

these items. ASAP Systems' Head of Engineers, Joseph Azzi, claims, "This is just one more tool

users have to make inventory management easier and more efficient" (ASAP Systems, Inc.,

2019, p. 4). While this type of inventory tracking and management system can be costly,

companies can expect a profitable return on their investment when properly implementing the

system. Companies possessing an easy-to-use system like this for customers to view and

purchase products will increase new customer acquisitions and improve existing customer

retention. Satisfied customers will continue to return to the company to purchase the goods or

services they need, continually driving sales and profitability.

Exchanging accurate, timely, and relevant information between customers and suppliers is

vital for business success. In today's world, where everyone wants information at the click of a

search button, quickly exchanging information can make or break a sale for a company.

Companies can stay ahead of the curve by implementing EDIs within their supply chain

operations. The type of information visible on the customer's end will vary from company to

company, as each one will have its unique information sharing policies. For example, Eastman

Chemical Company has an EDI system that allows customers to see information that is pertinent

to the purchase order, such as the PO Acknowledgement that contains the customer information,

supplier address, PO number, Eastman order number, and then the product, the customer

material number, and pricing (depending on the specifications). Having pertinent information
Exploring Inventory Management’s Effects on a Company’s Profitability 19

ready at a moment's notice can be a substantial competitive advantage over competitors that do

not have a competent EDI system in place. It is hard to imagine a large company today that still

relies on sending paper forms back and forth with their customers. Implementing EDI will also

help companies " develop more effective production and inventory control policies that can bring

higher profit and better customer service" (Huang, 2004, p.1).

One overlooked aspect of inventory management is overdependence. Overdependence can

propel companies into uncomfortable and desperate situations. For example, many companies in

the United States that generally have PPE on hand for employees were forced into a bind when

the coronavirus pandemic began in early 2020. Most PPE supplies, including protective face

coverings, latex gloves, and other preventative gear for the coronavirus, are manufactured

overseas in China and Vietnam. The urgency of the coronavirus spread caused people and

companies to "panic buy" PPE gear which left shortages across most manufacturers rather

quickly. These shortages compelled customers to wait for their PPE as manufacturers tried to

catch up. When partial PPE supply returned, companies paid significantly higher prices than the

average rate due to the scarcity of the products and the overwhelming demand for them. Having

an effective inventory management policy can help companies maintain multiple suppliers for

these products as a safety net if one of the suppliers sells out of the PPE equipment. Companies

may also consider manufacturing their own PPE equipment to maintain in their inventory for

self-use, avoiding relying on suppliers for these products entirely.

Companies like JCPenney and Guitar Center fall under the categories of both retailer and

e-tailer, which comes with its own set of responsibilities that can affect inventory management

processes and profitability. "Inventory control and assignment of distribution responsibility each

can impact how a retailer/e-tailer handles its online fulfillment" (Mahar 2005, p. 25). For
Exploring Inventory Management’s Effects on a Company’s Profitability 20

example, companies that offer online shopping where the purchased products can be sent directly

to the customer's house or BOPIS (Buy Online Pickup in Store) services must decide what

inventory pool to utilize. Firms could choose to use the inventory available at a particular

warehouse, inventory at the brick-and-mortar stores, or both, which is the most common choice.

Suppose companies choose to have products sourced from multiple locations. In that case, they

must be aware that the overall shipping cost could increase if orders contain items that must ship

from multiple locations. Now, these companies could make the customers pay for the shipping

by either increasing the price of the items or charging more for shipping. Alternatively,

customers could look elsewhere for the products they want. The potential solution lies in an

effective inventory management policy. A practical and successful inventory/warehouse

management practice can help offset profit loss due to inefficient shipping. Companies with

inventory in both brick-and-mortar stores and warehouses should monitor the inventory levels of

each to avoid a potential loss via overstocking or stockouts. Atnafu (2018) claims, "Ideally a

company wants to have enough inventories to satisfy the demands of its customers with no lost

sales due to inventory stockouts. On the other hand, the company does not want to have too

much inventory staying on hand because of the cost of carrying inventory." Specific applications

relating to effective IM policy include maximizing inventory storage space and equipment use,

reducing inventory and related handling costs, and processing customer orders efficiently

(Anonymous, 1987).

The coronavirus has been the ultimate test for supply chain and inventory managers

worldwide in the last decade. The supply chain's long-term problems are "unpredictable

consumer habits now arising due to the effects of various lockdowns and restrictions" (Emerald

Publishing Limited, 2021, p. 23). Without being able to predict what consumers will do, supply
Exploring Inventory Management’s Effects on a Company’s Profitability 21

chain managers will not be able to manage their inventory at the same level as they have been,

which can drive down overall sales and profits. Better communication between companies and

the customer base would prove beneficial during trying times like these. It would allow supply

chain managers to better understand the customer's priorities and needs. Another means of

gaining more accurate consumer data during times like these would be for companies to develop

more adaptable demand forecasting software that can better accommodate more uncommon

factors that may affect consumer demand.

Exploring Inventory Management’s Effects on a Company’s Profitability 22

Conclusion

Profitability is a crucial metric for most businesses. Inventory management plays a

prominent role in a company's profitability. It is essential to understand this relationship because

proper utilization of inventory management can drastically impact profitability, giving

companies a competitive advantage in a world where new competitors emerge every day.

Inventory management focuses on having the right items on hand at the right time to meet

customer demand while controlling costs and minimizing waste and loss. If appropriately

implemented, inventory management is vital for lowering costs, improving profitability, and

creating and sustaining a competitive advantage. Proper execution demands firms to utilize the

methods provided by both the current and previous research discussed in this thesis. Benefits of

an adequately implemented inventory management policy include improved inventory tracking,

warehouse/operational efficiency, improved communications, and profitability, among many

others. Future research could focus on how inventory management recovered and evolved from

the coronavirus pandemic. Future research should also explore the value of improved

technology, analytics, personalization, and automation to help companies assess where to invest

resources, engage stakeholders, and optimize data use to advance growth and profitability

(Jenkins, 2021). The presented research is founded upon previously published studies and

applied to real-world scenarios.

Exploring Inventory Management’s Effects on a Company’s Profitability 23

References

Anonymous. (1987). Inventory Management: Controlling Costs to Maximize Profits. Small

Business Report, 12(8), 50-53.

ASAP Systems. (2019, July 16). ASAP Systems, an Inventory System and Asset Tracking
Solution provider Continues to Make Inventory Management Easier: ASAP Systems, an
Inventory System and Asset Tracking Solution Provider, reacts to what their customers
want and enhances its Inventory Shopping Cart to provide a view only option. [Press
release] https://www.proquest.com/wire-feeds/asap-systems-inventory-system-asset-
tracking/docview/2258168260/se-2?accountid=10771

Atnafu, D. & Balda, A. (2018). The impact of inventory management practice on firms'
competitiveness and organizational performance: Empirical evidence from micro and
small enterprises in Ethiopia. Cogent Business & Management, 5 (1).
https://doi.org/10.1080/23311975.2018.1503219

Cavinato, J. (1990). Managing Different Types Of Inventory. Chilton's Distribution, 89(3), 88-
92.

Chang, J. (2022, January 14). 97 supply chain statistics you must know: 2021/2022 market share
analysis & data. Financesonline.com. Retrieved March 25, 2022, from
https://financesonline.com/supply-chain-statistics/

Eastman Chemical Company. (2020). Eastman 200 Annual Report,

https://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_EMN_2020.pdf

Edelman, M.P. (1990). Use of the Inventory Turnover Measurement. Hospital Material
Management Quarterly, 12(1), 50-56.

Emerald Publishing Limited. (2021). Supply chain resilience: Strategies in response to COVID-
19 and its impact on supply chains, Strategic Direction, 37(6), 23-24.
https://doi.org/10.1108/SD-04-2021-0041

Frost & Sullivan. (2021, November 11). COVID-19 Impact Analysis on the Personal Protective
Equipment (PPE) Supply Chain: The COVID-19 pandemic has permanently changed
several aspects of global manufacturing and supply chain ecosystems. One of the most
notable changes is in the personal protective equipment (PPE) supply chain, [Press
release] https://www.proquest.com/wire-feeds/covid-19-impact-analysis-on-personal-
protective/docview/2595916104/se-2?accountid=10771

Goddard, W. & Melville, S. (2004). "Research Methodology: An Introduction." 2nd edition,

Blackwell Publishing.

Gołaś Z. (2020): Effect of inventory management on profitability: evidence from the Polish food
industry: Case study.
Exploring Inventory Management’s Effects on a Company’s Profitability 24

Hayes, A. (2022, March 17). Inventory management definition. Investopedia. Retrieved April 9,
2022, from https://www.investopedia.com/terms/i/inventory-management.asp

Herzig, T. L., (1976). LIFO and FIFO and their effects on profits and cash flow during inflation
and deflation (Publication No. EP36223) [Master's thesis, University of Montana]
ProQuest Dissertations Publishing.

Horton, M. (2021, December 7). The difference between profitability and profit. Investopedia.
Retrieved April 9, 2022, from https://www.investopedia.com/ask/answers/012715/what-
difference-between-profitability-and-profit.asp

Huang, B. (2004). Optimal Production-Inventory Policies in Supply Chains with Information

Sharing (Publication No. 3132538) [Doctoral dissertation, Northwestern University]
ProQuest Dissertations Publishing.

"Interpretivism (Interpretivist) Research Philosophy." (n.d.) Business Research Methodology.

https://research-methodology.net/research-philosophy/interpretivism/

Jenkins, A. (2021). 14 top inventory management trends to know in 2021. Retrieved March 26,
2022, from https://www.netsuite.com/portal/resource/articles/inventory-
management/inventory-management-trends.shtml

Kalivas, N. (2018, February 16). Indexology Blog. Indexology Blog SP Dow Jones Indices.
Retrieved March 25, 2022, from https://www.indexologyblog.com/2018/02/16/what-do-
inventories-tell-us-about-the-economy/

Mahar, S. (2005). Inventory and distribution strategies for retail/e-tail organizations

(Publication No. 3183918) [Doctoral dissertation, Indiana University] ProQuest
Dissertations Publishing.

Meyers, M.D. (2008) "Qualitative Research in Business and Management." SAGE Publications.

Palinkas, Lawrence A. et al. "Purposeful Sampling for Qualitative Data Collection and Analysis
in Mixed Methodology Implementation Research." (November 6, 2013). Administration
and Policy in Mental Health and Mental Health Services Research, Vol 42, pp. 553-544,
https://link.springer.com/article/10.1007/s10488-013-0528-y.

RFID Inventory Systems. (2016, March 31). RFID Inventory Systems, Inc. Introduces Its Patent
Pending Tower Inventory System: TIS Helps Warehouse Owners Realize RFID
Efficiencies, [Press release] https://www.proquest.com/wire-feeds/rfid-inventory-
systems-inc-introduces-patent/docview/1776790829/se-2?accountid=10771

Saunders, M., & Thornhill, A. (2012). "Research Methods for Business Students 6th edition,
Pearson Education Limited.
Exploring Inventory Management’s Effects on a Company’s Profitability 25

Tuovila, A. (2021, July 21). Average cost method definition. Investopedia. Retrieved March 23,
2022, from
https://www.investopedia.com/terms/a/averagecostmethod.asp#:~:text=The%20average
%20cost%20method%20assigns,as%20the%20weighted%2Daverage%20method

Vellequette, L. P. (2019). OVERSTUFFED: Near-record inventories eat dealer profits as

floorplan costs surge. Automotive News, 93(6879).

Yang, L. (2016). Optimizing Inventory for Profitability and Order Fulfillment Improvement:
Integrating Inventory Classification and Control Decisions under Non-Stationary
Demand For Profit Maximization and Integrating Inventory Classification and Control
Decisions to Maximize Order Fulfillment Measures (Publication No. 10116256)
[Doctoral dissertation, University of Missouri - Saint Louis] ProQuest Dissertations
Publishing.
Exploring Inventory Management’s Effects on a Company’s Profitability 26

Appendix

1.1